Finance Committee on May 26th, 2009

[Jeff van Duynhoven]

In the case of Visa debit, I think they would like to accept them for contactless capabilities, so the tap and go capability, or for e-commerce or other card-not-present transactions. Those are new opportunities for them to use that particular card. The reason they wouldn't want to accept it is that Interac works today at the point of sale for debit. As I said in my opening remarks and Jim has mentioned, there is interchange attached to Visa debit. So at the point of sale, at this point in time, just on the pure cost equation it would be questionable whether they would want to take that card. Again, they'll have the choice to not accept Visa debit at the point of sale.

[Gord Brown, Conservative, Leeds—Grenville, ON]

A Visa debit transaction would be at a set fee or at a percentage fee?

[Jeff van Duynhoven]

It depends on the acquirer. Acquirers determine the price. Today there is zero interchange on Interac transactions, but there still is a cost obviously to the merchants for us to process. In the case of Visa debit, the electronic interchange rates--so when the card is there--is five cents plus 25 basis points. So that is an increased cost for the merchant. But the acquirer still needs to charge for all of its other costs, so it will be north of that particular transaction amount.

[The Co-Chair, Conservative, Michael Chong]

Thank you very much, Mr. van Duynhoven.

Thank you very much, Mr. Brown.

It is now Mr. Vincent's turn.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chairman.

Thank you to the witnesses. I have a few questions.

Earlier, you stated that Visa and MasterCard do not get anything from the interchange fees. Did I understand correctly? If those companies do not receive anything from the acquirers or from the banks, can you explain why they are the ones setting the interchange fees?

[Jim Baumgartner]

Visa and MasterCard do not make money from interchange. Their revenue model is driven off assessment fees that are charged to merchant processors like us as well as assessment fees that are charged to the issuers. So it's in their best interests to try to maximize the flow-through of volume in the system. The more charge volume that goes through the system, the more we end up paying in assessment fees, the more the issuers end up paying in assessment fees, and that's in their best interest. So what they have to do is try to balance the interchange rate and set the interchange rate in a way that maximizes participation in the system. In that respect, they'll be able to get as much volume as possible.

So things like the contactless debit, for example, as Jeff pointed out, would be innovations that would bring more volume into the system, presumably generate more assessment fees, and make their shareholders happy.

[Robert Vincent, Bloc, Shefford, QC]

You stated earlier that you were not involved at all in changing the interchange fees of the credit cards. Since Visa and MasterCard do not get any money from that, how come you are not involved in setting those fees, even when you talk about volume? If the interchange fee was set at 1%, the volume would be the same as if it were set at 2%. You collect money on all the transactions and you claim that the interchange fees are too high.

Why are you not putting the question to Visa and why do you not ask them to lower the interchange fee? Is there a particular reason?

[Jim Baumgartner]

In the case of debit, we actually did have some success with MasterCard. They had a model similar to what Jeff had described with Visa. In that case we were able, with others I'm sure, to convince them that a more competitive model was appropriate given their current situation. They did listen. I'll give them credit for that.

In the case of credit, I think the challenge, at least with their premium cards, has been trying to compete against American Express, which has historically had a higher-end customer, those who charge more. The worst thing that could happen in the system today would be if they weren't able to compete against American Express for those higher-end customers, if the interchange rate was too low and banks decided to start issuing American Express cards, because those are much more expensive than Visa and MasterCard. Even the premium Visa and MasterCards are less expensive than Amex is today.

[Robert Vincent, Bloc, Shefford, QC]

I have a final question.

It relates to smart cards. You said that starting in October 2010 the retailers will be liable if payments are not processed correctly. If that is the case, are you going to provide them with the equipment needed to read those cards free of charge or will they have to pay something to replace their equipment?

Also, do you believe that interchange fees could be reduced when the liability for chip cards is shifted to the retailers?

[Jim Baumgartner]

With respect to your first question, in terms of fees, we are not planning on any fee increases as a result of deploying the new terminals. We now have probably about 140,000 or so chip-enabled devices at our various merchants. We're working on replenishing them by 2010, to make sure those who need them will have them.

Our average terminal rental rate has come down over the last few years. So even though the equipment has gotten a little more expensive, the actual rate has come down so the merchants won't bear it. There's one exception, and that is the merchants who own their own devices. They tend to be the really large merchants. They'll have to upgrade and purchase new equipment to be able to handle the transactions. They'll have to do work at their host. This is a very expensive proposition for, generally, the major merchants, because a lot of them will own their own devices.

In the case of the smaller merchants, we tend to own them, and we tend to rent them.

[The Co-Chair, Conservative, Michael Chong]

Thank you.

Mr. Carrier, you have one minute.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you.

Good afternoon, lady and gentleman. I would like to come back to the issue of premium cards. Who bears the additional cost of interchange in the case of premium cards?

You are aware that Canadian and Quebec coalitions of retailers have spoken against those cards because there will be additional costs to them.

Mr. Van Duynhoven stated that, sometimes, you absorb the additional costs of interchange for chip cards.

Did I understand correctly? Is that the case?

[Jim Baumgartner]

It varies by merchant. But in some cases, if we have a fixed rate for the merchant, we end up eating the difference.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Since you are not in business to lose money, I suppose that this additional cost will in the end be added one way or another to all the operational costs you charge to the retailers.

Since I do not have too much time, I want to know a few things. You know that retailers' coalitions have also recommended the Australian system for setting the interchange fees.

What do you think of that suggestion?

[Jim Baumgartner]

In general, I suppose, my view is that government-imposed price controls on businesses tend to not work. It's more of a commercial dispute.

One of the issues that I'd have with it, having read a bunch of the studies, is that there are pros and cons. I don't know if you've had a chance to read some of the studies, but there are a lot of cons and there are some pros to what they did, at least according to the studies that I happened to read. One thing that definitely happened was, because they didn't include American Express in that endeavour, it ended up benefiting them unfairly, I would say from my perspective. And also, I think to the extent that you did that, in this particular instance—and we had banks that migrated their issuing portfolios to American Express—the merchants would be in a much worse situation because the average rate for American Express is much higher than it is for MasterCard and Visa, including the premium cards.

[The Co-Chair, Conservative, Michael Chong]

Thank you very much, Mr. Baumgartner.

Thank you, Mr. Carrier.

Now we have the venerable chair of our Standing Committee on Finance, Mr. Rajotte.

[The Co-Chair, Conservative, James Rajotte]

Thank you very much, Mr. Chairman.

Thank you all for coming in today.

I want to address my questions to you, Mr. van Duynhoven, because you've provided some documentation that I think is helpful here. What I really want to do is to drill down to try to understand all of the fees that are being charged to merchants.

First of all, you have the Visa corporate, commercial, and business card transaction fee, which, if I'm reading this correctly, increased, according to this letter of February 2008. You have a Visa Infinite card transaction fee, which is a new fee. Then you have a Visa assessment fee, which seems to be a new fee as well. And then you have the merchant discount rate, which, interestingly, actually decreases, according to the documentation here.

The merchant discount rate includes, according to the information we have, the interchange fee plus other costs. What proportion of the merchant discount rate is the interchange fee?

[Jeff van Duynhoven]

Again, it would depend on individual merchants. It depends on how the merchant does the processing and the risk involved with that transaction—if, for example, it's an airline or a tour company or a furniture store. Any organization that has delayed delivery has increased risk for the acquirer. So it's difficult to say in total what it is, but on average—

[The Co-Chair, Conservative, James Rajotte]

Seventy-five per cent?

[Jeff van Duynhoven]

Yes, at least 75%, probably, of our cost is the interchange cost.

[The Co-Chair, Conservative, James Rajotte]

Seventy-five per cent of the merchant discount rate is the interchange fee. And these three fees you have here, which you've outlined, are those all included within the merchant discount rate?

[Jeff van Duynhoven]

No, it happened when the interchange rates changed; now they all are driven and there are differential interchange rates attached for each type of card. So a commercial card has a unique set of fees or interchange rates attached to it, as does an Infinite card, as does a regular consumer card. So what we've done is we've tried to articulate that and manage that so the merchant understands that my costs have gone up, for example, 20 basis points for an Infinite card and 36 basis points for a commercial card. We've tried to reflect that on the statement and pass that increased cost on in the example we've shown.

[The Co-Chair, Conservative, James Rajotte]

And why is the merchant discount rate decreasing in this example?

[Jeff van Duynhoven]

Again, depending on how the merchant was processed before, we did not pass through the commercial card transactions. As I said in my opening statement, in some cases we blended the rate. As an example, we would have said the merchant discount rate was 2%. We may have now moved to 1.8% plus 20 basis points for Infinite or plus 36 basis points for commercial. So we've tried to unbundle the pieces to better reflect the new structure Visa has implemented.

[The Co-Chair, Conservative, James Rajotte]

So if I'm a merchant and I'm paying this merchant discount rate, my merchant discount rate may have in fact gone down. My interchange fee will vary because it has gone from two to 21 possible rates. But with these three fees, if somebody does walk in with an Infinite card, in fact they'll have an increase in the first type and the introduction of two fees that were not there previously, on top of the merchant discount rate? Am I correct in saying that?